BrokerJun 27 2017

Brokers fear business hit from Bank mortgage rule change

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Brokers fear business hit from Bank mortgage rule change

Mortgage brokers have expressed fears their businesses could take a significant hit following changes to the Bank of England’s (BoE) affordability requirements.

This morning (27 June) the BoE told lenders to test affordability using a 3 percentage point increase on their current reversion rate – usually the standard variable rate (SVR) – instead of a 3 percentage point rise on the Bank Rate, which has been in use since 2014.

It said the previous requirements were too open to interpretation by lenders, while the new rules would promote “consistency of implementation”, insure against the risk of loosening underwriting standards and make sure affordability was tested in the event borrowers were unable to refinance at the end of their fixed-term periods.

But brokers have expressed concerns that clients could be priced out of the market at a time when many are already struggling to get on the housing ladder.

Mike Richards, director at London-based Mortgage Concepts Associates, said: “I think it would have probably priced some out of the market who have got mortgages now. I think it is really going to affect some people.

“It does seem to be stupid - if the government wants more properties in the residential market, why are they doing this?

“What we are trying to do is diversify into other areas that don’t have this problem, like lifetime mortgages.”

Daniel Bailey, principal at Derbyshire-based Middleton Finance, added: “It is quite a big jump, 3 per cent on top of the reversion rate - especially for first-time buyers. It is hard enough for them to get on the property ladder and could have quite a significant impact.

“It could potentially have an impact on my business and the market as well. We do due diligence and check affordability quite rigorously - the current criteria are pretty good, so it could have a big impact on first-time buyers and people looking to move house.”

But Ray Boulger, senior technical manager at London-based John Charcol, said he did not think the changes would make a great deal of difference to the market.

“I think the ones it will affect will be the smaller lenders,” he explained.

“A number of them assume that because they did not cut SVR as much as bank rate when bank rate fell they have business models that suggest they won’t increase in line with bank rate, and on that basis have been able to apply stress rates that don’t include a pro rata increase in SVR.

“The proportion of lending affected should be no more than 20 per cent, but the number of lenders affected will be higher than that. It will effectively price them out of the market if they don’t deal with it.”

Alice Watson, head of marketing at Retirement Advantage Equity Release, said the changes would cause concern for older borrowers.

She said: “Typically, customers approaching retirement find it harder to secure a new mainstream mortgage because their income may be lower or more inconsistent. More stringent assessments could make it even harder for those customers to get a mortgage.”

According to Moneyfacts, the lowest SVR – 2.95 per cent – is currently offered by Stafford Railway Building Society, while the highest – 6 per cent – is offered by MBS Lending. The average rate across more than 80 lenders is 4.6 per cent.

In April, The Council of Mortgage Lenders urged the BoE's financial policy committee to reconsider its 3 per cent affordability test.

At the time, chairman Peter Hill said: “It is the CML’s view that the Bank’s policies risk having a net adverse effect on the housing market and it should be looking to soften the impact.

“A failure to do so may unnecessarily cramp the ability of home-owners to move house and undermine the smooth functioning of our housing market.”

A spokesperson for the British Bankers' Association said: “Since the crisis, significant work has been done to ensure the industry is strong enough to continue to support businesses and consumers.

"Today’s announcements by the FPC mark the next step in this process, and the industry will work closely with the Bank of England to implement these recommendations on mortgage affordability to ensure that any building of mortgage debt does not compromise lenders’ resilience or financial stability.”

The Council of Mortgage Lenders did not respond to a request for comment.

simon.allin@ft.com